Pandemic Imperils Business Focus On Low-Cost Supplies? Really?

With the COVID-19 pandemic still spreading around the world, the death count rising daily, and social risks rising in many countries, it’s still tough to make many lasting predictions about the long-term fallout from one of the world’s worst disasters of the past century.

One long-time business approach that’s already seen in jeopardy is for multinationals to prioritize low costs in their manufacturing and sourcing investment decisions. What used to be good business now can “imperil the business,” according to a new report this week by global consultancy Bain.。 

“The Covid-19 outbreak isn’t an isolated event,” Bain said. “Disruptions are increasing in frequency and magnitude, including geopolitical events, climate-related disasters and public health crises. Brexit and the US–China trade war are recent examples.” 

“For decades,“ it continues, “low-cost supply and minimal inventory were the key tenets of supply chain management,” Bain said. “But in an increasingly turbulent world, supply networks that are overly dependent on the lowest-cost supplier and minimal inventory levels can rapidly imperil the business.”

A new buzzword has now appeared: resilience.

 “When US–China trade tensions flared last year, leading companies already started to rethink the cost of network risk and invest in more resilient supply chains. Flexible networks help companies adjust quickly in times of stress. They also help production teams pivot nimbly to meet changing market demand, a significant competitive edge.” 

According to Bain, companies with resilient supply chains grow faster because they can move rapidly to meet customers’ needs when market demand shifts. They increase their “perfect order rate” by 20-40% and customer satisfaction by as much as 30%, it said. “Importantly, flexible supply chains cut costs and improve cash flow, in part through a 10% to 40% increase in inventory turns. Finally, leaders reduce disruption by building buffers throughout the supply network and invest in advanced analytics to improve planning and forecasting accuracy,” says Bain. 

Hence, old ways are out. “Once the pandemic passes and the global economy begins to function normally, many senior executives might assume they should manage their global supply networks as in the past, with the lowest- cost supply and minimal inventory levels. While that approach worked in a stable global economy, it now brings increased risk.”

Will change really happen? Businesses based in Taiwan, for instance, even before the pandemic had already been taking advantage of incentives to invest at home compared with mainland China. (See post here.)  Among the businesses listed as participating in the government action plan are electronics industry leaders Taiwan Semiconductor Manufacturing, or TSMC, Quanta, Yageo, AU Optronics, and Accton. And in the U.S., Larry Kudlow，President Trump’s chief economic advisor, has spoken of paying the “moving costs” of American companies to relocate home from China.   New tax and policy changes in the U.S. could prove powerful. 

Yet big markets and economies like China will still have their own pull. Just this week, socially minded Starbucks announced new investment plans there with U.S. venture fund Sequoia. (See story here.) The mainland itself is also pouring investments into new technology and making policy adjustments that will heighten its supply-chain competitiveness. (See related venture capital story here.)  The world, as the pandemic lays bare, isn’t static.

The appalling shortages of key supplies in this the U.S. healthcare system amid the pandemic suggest public outrage will lead to new sourcing shifts in that industry. Yet, overall, industry responses may vary, along with political fallout and policy action in different countries. That would still leave plenty of room for consultants like Bain to show off their business math skills and help companies and governments find ways forward.  

 @rflannerychina